Indonesia’s steel maker PT Gunung Gahapi Sakti and China’s major diversified group Fosun International Limited will jointly build a steel mill in Medan, North Sumatra to tap into the country’s growing demand for steel products.

Executives from both companies revealed the business plan during a meeting with Industry Minister MS Hidayat and other industry officials on Friday in Jakarta.

Speaking to reporters after the meeting, the Industry Ministry’s director general for manufacturing-based industry Panggah Susanto said the two companies would spend up to US$200 million on the construction of the steel plant.

He said that the development of the steel plant, estimated to take three years, would run in two phases, with each phase absorbing $100 million.

In the initial stage of operation, the steel mill blast furnace would be able to annually produce 500,000 tons of various steel products, such as steel slabs and billets, but it would gradually increase to 1 million tons.

“With such a capacity, the blast furnace can make fully utilized iron ore available domestically,” Panggah said, citing Aceh and Padang as two potential sources of raw material.

Currently, some local steel plants still use obsolete technology, making them dependent on imported raw materials, such as steel scrap or certain types of iron ore.

Indonesia has seen its national steel consumption rise, driven by robust demand from construction, infrastructure and automotive sectors.

Domestic steel use will expand by between 6 and 9 percent this year from 10.4 million last year, according to an estimate by the Indonesian Iron and Steel Industry Association (IISIA).

The nation still fulfills between 35 and 40 percent of the total steel demand each year from imports as local capacity cannot meet domestic demand in terms of volume and specific varieties.

Seeing the huge opportunities in the domestic market, several firms are upgrading their capacity to cope with rising demand. Indonesia’s biggest steel producer Krakatau Steel, for example, is teaming up with the world’s third-biggest steel maker South Korea’s Pohang Iron and Steel Company (Posco) to set up a steel plant in Cilegon, Banten, with an investment of $6 billion. It is also constructing a blast furnace on its own near its existing plants in Cilegon with an anticipated investment of $601 million.

India-based Essar Group recently said it would spend $125 million to boost the capacity of its plant, operated by its local unit in Cibitung, Bekasi, West Java, to 700,000 tons of cold rolled coil per year from 400,000 at present.

The rising output of steel, including from the plant blast furnace of Gunung Garuda, would help push down steel imports, and would better utilize local material ahead of the implementation of an export ban on mineral commodities in 2014, Panggah said. Indonesia, one of the world’s big producers of mineral commodities, will totally stop exports of unprocessed minerals in order to spur development in its downstream industry. The move has prompted it to receive sizeable new investments for refineries and smelters.